What’s holding up the oil price? One-word answer: The dollar

Oil rose in the overnight New York session to $48.94, despite a DOE inventory report showing crude oil inventories at 8.17 million barrels vs. a consensus estimate of 4.912 million. Saudi Arabia, meanwhile, keeps pumping oil and will continue to more than meet market demand, according to Citibank analysts led by Seth Kleinman. They wrote March 25: ” The Kingdom’s decision regarding its huge oil reserves can be cast in a simple light: sell them now or leave them in the ground and sell them later. The structural changes to both supply and demand that Citi has been trumpeting for the last few years–the shale revolution and its (now delayed) worldwide spread, along with the prospect of peak demand due to fuel substitution and efficiencies–raise the prospect of prices being much lower in the future than in the recent past, doubly so if climate change regulation is ever implemented seriously. Within this context the Saudi decision does make sense, and the likelihood of it changing appears low. The corollary of this is that Saudi Arabia could even ramp up production, both using its spare capacity and increasing current capacity. The tick-up in March exports to ~7.3-m b/d, Naimi’s comments that the Kingdom is producing ~10-m b/d and the surge in oil rig counts to a record high all are suggestive of that interpretation. And for now, demand is rising, and the Saudis appear prepared to meet this.”

Supply and inventory considerations seem bearish across the board. What’s holding the oil price up? There are any number of explanations circulating, including the possible impact of the civil war in Yemen on the Kingdom of Saudi Arabia’s political stability. There’s no way to test this kind of conjecture.

A simpler answer is that recent strength in oil is just the flip side of the US dollar’s recent weakness. Plotting oil tick data vs the DXY trade-weighted dollar index for the past week, Asia Hedge observes that the fit is nearly perfect. In the very short term, your dollar call is your oil call. Supply factors